*52 Decision will be entered under Rule 50.
On November 22, 1944, petitioner paid $ 2,065,842.02 to the United States in an agreed settlement of a claim by the O. P. A. that petitioner had made overcharges on the sale of some of its woolen and worsted fabrics covering the period June 22, 1942 to October 16, 1944. Petitioner, in calculating its ceiling prices under Maximum Price Regulation 163, took practicable precautions and its actions were in good faith and not the result of an unreasonable lack of care. Held, the payment of $ 2,065,842.02 is deductible under section 23 (a) (1) (A) of the Internal Revenue Code.
*705 The Commissioner determined deficiencies in petitioner's excess profits tax for the calendar years 1944 and 1945 in the amounts of $ 1,478,587.99 and $ 26,422.29, respectively. The deficiencies resulted from several adjustments made in the income as reported by petitioner. Assignments of error were originally made as to all of these adjustments. However, at the hearing petitioner filed an amended petition in which all of these assignments of error were abandoned except as to one main adjustment which the Commissioner had made for 1944. In its amended petition, petitioner contests only the deficiency for the year 1944 and assigns errors as follows:
(a) The Commissioner erred in overstating the petitioner's excess-profits net income for the taxable year 1944 by disallowing as a deduction, under section 23 (a) or (f) of the Internal Revenue Code, the amount of $ 2,065,842.02 paid by the petitioner to the Office of Price Administration in 1944.
(b) If it be determined that the Commissioner did*54 not err as stated above, then the Commissioner erred in including in the petitioner's gross income for the taxable year 1944 the amount of $ 1,287,322.11, which was attributable to sales made by the petitioner in the taxable year 1944 and which was paid to the Office of Price Administration in said taxable year.
(c) The Commissioner erred in determining that the petitioner underpaid its taxes and in determining the deficiency complained of.
The $ 2,065,842.02 was paid by petitioner to the Office of Price Administration in settlement of a claim resulting from alleged overcharges *706 made by petitioner on the sale of worsted and woolen civilian fabrics. The overcharges resulted from the fact that petitioner in computing its ceiling prices used foreign top as its raw material and applied to the calculated cost of its fabrics a profit ratio which involved the cost of goods sold in 1941, whereas the Office of Price Administration determined that under the applicable regulation petitioner was required to use the cost of foreign raw or grease wool as its raw material and a profit ratio involving the cost of goods manufactured in 1941.
FINDINGS OF FACT.
Many of the facts have been *55 stipulated and they are found accordingly. Other facts are found from the evidence.
Petitioner is a corporation organized in 1850 under the laws of Massachusetts with principal offices in Boston, Massachusetts. It filed its excess profits tax and income tax returns for the calendar year 1944 with the collector of internal revenue for the district of Massachusetts. It keeps its books and files its returns on the accrual basis of accounting.
Petitioner is, and since 1850 has been, engaged in the textile business. It manufactures and sells woolen, worsted, cotton, and rayon fabrics. Since 1850, petitioner has been operating its woolen and worsted division at Lawrence, Massachusetts. In 1942, 1943, and 1944, this division manufactured women's dress goods, coatings, men's wear, linings, automobile fabrics, and Government fabrics.
Prior to the early 1930's petitioner purchased raw or grease wool, either foreign or domestic, which it sorted, cleaned, and combed to manufacture what is known as top. Petitioner then spun the top into worsted yarn which was woven into worsted fabrics. In the early 1930's petitioner shifted to a policy of purchasing top instead of raw wool. Petitioner*56 bought 4,643,900 pounds of top in 1939, 6,839,700 pounds in 1940, 5,302,000 pounds in 1941, and 484,000 pounds in 1942. By 1939, petitioner had also resumed the purchase of raw wool. It bought 16,000 pounds of raw wool in 1939, 296,700 pounds in 1940, 1,603,600 pounds in 1941, and 5,847,710 pounds in 1942.
In the manufacture of its fabrics petitioner does not distinguish between foreign and domestic wools as wool of the same grade is interchangeable in so far as the fabric is concerned. There are, however, price differentials between foreign and domestic wool of the same grade. Before 1939, the price of domestic top was lower; in late 1939 and early 1940, it was higher; in mid-1940 it was lower; in late 1940 it was higher and remained higher throughout the war. In Revised Price Schedule 58, as amended March 27, 1942, appendix B, 7 F. R. 2397, the Office of Price Administration (hereinafter called O. P. A.) established different maximum prices for foreign and domestic *707 top. Before 1941, petitioner generally used domestic wool for apparel fabrics; in 1941, petitioner used more foreign wool than domestic.
As far back as its records are available*57 petitioner has always considered top as its raw material in estimating costs and setting its prices. Grease wool is not regarded as the raw material because the cost of grease wool cannot be determined until after it is made into top.
Before 1942, petitioner, in pricing its contemplated fabrics, consistently used the lowest cost of top, whether domestic or foreign, which it believed would hold for the particular season. A fabric priced on the basis of foreign top might be finally made from domestic top, or vice versa. Petitioner never revised the price of a fabric because of such changes. Before 1941 and early in 1941, petitioner used the estimated cost of domestic top in setting its prices; later in 1941 petitioner used the estimated cost of foreign top.
In February 1942, petitioner shifted its cost estimates and price calculations from a foreign top basis to a domestic top basis. The basis for this shift to domestic top was that petitioner believed that domestic top would very likely be its only source of supply. In early 1942, petitioner revised its cost estimates of nine fabrics previously based on the cost of foreign top to reflect the cost or ceiling price of domestic *58 top. In the same period the costs of about 50 additional fabrics were directly computed on the basis of the ceiling price of domestic top. Thereafter all of petitioner's cost estimates of its civilian fabrics were based upon the ceiling price of domestic top.
On June 16, 1942, the Administrator of O. P. A. issued Maximum Price Regulation 163, which became effective on June 22, 1942. Maximum Price Regulation 163 (hereinafter referred to as MPR 163) fixed the maximum prices which could be charged by manufacturers of woolen and worsted civilian apparel fabrics. The Administrator also issued a Statement of the Considerations and a press release interpreting the scope and meaning of MPR 163 to the industry.
The ultimate conflict between petitioner and O. P. A. related to overcharges made by petitioner on sales of "new" 1 woolen and worsted civilian apparel fabrics, none of which sales were made for use or consumption other than in the course of trade or business. The alleged *708 overcharges were a result of petitioner's determination that its raw material was purchased foreign top and its profit ratio for 1941 was to be computed using the cost of goods sold in 1941, whereas *59 the O. P. A. determined that petitioner's raw material was foreign grease wool and its profit ratio for 1941 was to be computed on the basis of cost of goods manufactured in 1941.
Section 1410.102 (d) of MPR 163 relating to the*60 maximum price of a new or worsted apparel fabric is as follows:
(d) New woolen or worsted apparel fabrics. The maximum price for a woolen or worsted apparel fabric for which a maximum price cannot be determined pursuant to paragraphs (a), (b) or (c) of this section, shall be computed by multiplying the sum of (1) the cost of the raw materials used in the fabric and (2) the manufacturing cost thereof, by the 1941 ratio of the manufacturer's weighted average selling price to his weighted average manufacturing cost of all woolen or worsted apparel fabrics. For the purpose of this paragraph (d):
The cost of raw materials and the manufacturing cost shall not exceed such costs, determined in accordance with the customary accounting practice of the manufacturer, which would have been incurred had the raw materials been delivered to the manufacturer and the fabric manufactured during March 1942;
The weighted average selling price shall be determined by dividing the total amount received during 1941 from the sale of all woolen and worsted apparel fabrics by the total number of yards thereof sold during 1941;
The weighted average manufacturing cost shall be determined by dividing the *61 total manufacturing costs of all woolen and worsted apparel fabrics manufactured during 1941 by the number of yards thereof so manufactured.
The Statement of the Considerations involved in the issuance of MPR 163 which considerations relate to new fabrics is as follows:
4. New fabrics. The formula to be used for determining the maximum price which a manufacturer may charge for a new fabric, which is not comparable to any fabric produced by him during an applicable selling period, is to multiply the cost of production of such new fabric, as determined by production costs during March 1942, by the ratio of the weighted average selling price to weighted average cost of all woolen or worsted fabrics produced and sold by him from January 1 to December 31, 1941. Thus, in determining maxima for new fabrics a manufacturer is limited to his production costs prevailing in March 1942. By this restriction prices for new fabrics will not be at levels higher than those provided for in the General Maximum Price Regulation.
The Press Release dated June 17, 1942, in connection with MPR 163, in so far as it relates to new fabrics, provides as follows:
For "new fabrics" not comparable to any fabrics*62 previously produced by a manufacturer, a simple formula to establish his selling price is provided. The manufacturer determines the raw material and manufacturing cost on the basis of March 1942 levels. He then multiplies this by the ratio of his 1941 weighted average selling price of all civilian woolen or worsted apparel fabrics he produced to his weighted average manufacturing cost of these same fabrics. The regulation provides the method for obtaining these weighted average cost and selling price items.
*709 The following is an example of how the selling price is established for a new fabric:
| Assume raw materials cost in March, 1942 | $ 2.00 |
| Assume manufacturing cost in March, 1942 | .85 |
| Total cost | $ 2.85 |
| Total weighted selling price of all civilian fabrics made and sold | |
| during 1941 by the manufacturer | $ 2.00 |
| Total weighted costs of all civilian fabrics made and sold during | |
| 1941 by the manufacturer | 1.90 |
| $ 2.85 x $ 2.00/$ 1.90 = $ 3.00 per yard selling price of the | |
| new fabric. |
Upon the issuance of MPR 163, petitioner's president, Henry W Bliss, instructed E. Dean Walen, vice-president in charge of the worsted division, to supervise compliance with the*63 regulation. In order to comply with MPR 163, Walen carefully studied the regulation, the Statement of the Considerations, and the accompanying press release. About 12 other officers and employees assisted him in the interpretation of the regulation, including the comptroller, the general manager of the woolen and worsted division, the head of the division's cost and accounting department, and two of the latter's top assistants. Under MPR 163 the maximum price of a new fabric was computed by applying a stated profit ratio against specified costs. The profit ratio called for an analysis of accounting records of 1941 operations which were at the Boston office under the supervision of the comptroller and assistant treasurer, Dwight B. Billings. The cost factors involved considerations and calculations resembling the cost estimating system employed by the woolen and worsted division at Lawrence. Walen and his assistants, therefore, calculated the cost factors, and Billings worked out the profit ratio.
After studying MPR 163, the Statement of the Considerations, and the press release, Walen and his assistants concluded that the raw material costs and manufacturing costs were to be*64 computed as of March 1942. Since, under the petitioner's customary accounting practice, the cost of top was the cost of the petitioner's raw material for pricing purposes, Walen and his assistants construed the regulation as authorizing the petitioner to use the highest cost of top which the petitioner would have incurred in March 1942. The highest March 1942 cost of top was the ceiling price of domestic top as established by Price Schedule 58.
After studying MPR 163, the Statement of the Considerations, and the press release, Billings concluded that a narrow literal interpretation of MPR 163 would not adequately reflect the underlying meaning and intention of the regulation. For example, as regards the numerator of the 1941 profit ratio, MPR 163 required a determination of the "total amount received during 1941 from the sale of all *710 woolen and worsted apparel fabrics." In a strictly literal sense this language meant to Billings that the numerator of the ratio was the total cash received in 1941 from sales made by petitioner. However, since petitioner's books were kept on an accrual basis, Billings decided that MPR 163 required him to compute the profit ratio on the basis*65 of sales accrued in 1941, rather than amounts received in that year. The O. P. A. never questioned this interpretation of MPR 163.
On the basis of MPR 163, as construed by the Statement of the Considerations and the press release, Billings decided that the denominator of the profit ratio was the cost of goods sold in 1941 and computed a 1941 profit ratio of 1.1539.
In the computation of the 1941 profit ratio, Billings used the actual cost of the actual raw materials used which included grease wool to the extent that grease wool was used. Billings discussed his conclusions with Walen and the latter's assistants. He also checked his conclusions with petitioner's legal counsel and accountants, who confirmed his views.
On and after July 17, 1942, petitioner filed 90 reports of new fabrics with O. P. A. Each report indicated the cost of the grade of top which petitioner intended to use in the respective fabric. The cost shown for the particular grade was the ceiling price of domestic top as established by Price Schedule 58, effective in March 1942. The manufacturing cost shown on each form was petitioner's manufacturing cost per yard in March 1942. The profit ratio was based on *66 the ratio of petitioner's weighted selling price of goods sold in 1941 to its weighted cost of goods sold in 1941.
On or about September 24, 1942, O. P. A. issued printed forms on which manufacturers were to report the ceiling prices of new fabrics. The forms contained a list of instructions which stated, among other things, that "The cost of raw materials for the new fabric shall be calculated at the highest cost which the manufacturer would have incurred for such raw material if purchased from his customary source of supply for delivery during March 1942." Walen concluded that this official interpretation further confirmed his view that the applicable raw material cost was the March 1942 ceiling price of domestic top. These instructions also contained the following:
17. The weighted average manufacturing cost shall be determined by dividing the total manufacturing costs, including the cost of raw materials, of all woolen and worsted apparel fabrics manufactured during 1941 by the number of yards thereof so manufactured.
In December 1942, two O. P. A. representatives reviewed petitioner's computation of ceiling prices under MPR 163. In addition to checking petitioner's calculation*67 of raw material and manufacturing costs, the O. P. A. representatives examined petitioner's method of computing its 1941 profit ratio. In reviewing the profit ratio, they *711 discovered that certain nonapparel fabrics which were low profit goods had been erroneously included in the computation. Accordingly, these fabrics were eliminated from the calculation, thereby increasing petitioner's profit ratio from 1.1539 to 1.1560. The O. P. A. representatives checked the calculation of the revised profit ratio. Apart from the error in profit ratio, they found nothing wrong with petitioner's calculation of ceiling prices for its new fabrics.
During the latter part of September 1944, O. P. A. inquired whether petitioner was using foreign or domestic top in manufacturing new apparel. Petitioner stated that it had been using foreign top for some time. About October 1, 1944, Carter Lee, the regional enforcement attorney in the Boston office of O. P. A., caused an investigation of petitioner's pricing methods. Petitioner's representatives met with O. P. A. officials approximately 25 times between late September and November 22, 1944, to discuss the ceiling prices of petitioner's *68 new civilian fabrics. The early discussions between O. P. A. and petitioner involved the following contentions by O. P. A. concerning the interpretation of MPR 163: (1) petitioner should have considered the cost of foreign raw wool as the cost of its raw material rather than domestic top; and (2) petitioner should have considered its actual cost of raw wool and its actual manufacturing cost rather than its highest March 1942 costs.
Petitioner contended that the method it had used in computing its ceiling prices was in accord with MPR 163, and the Statement of the Considerations and the press release accompanying it. The issue raised by Lee of O. P. A. regarding the use of actual current raw material and manufacturing costs as compared with its highest March 1942 costs was abandoned at an early stage of the negotiations upon advice given Lee by the O. P. A. price division.
On October 16, 1944, petitioner stopped billing its customers pending a resolution of its controversy with O. P. A. over its pricing policy. At a conference on or about October 20, 1944, which was attended by Walen and other representatives of petitioner, Lee, who had discussed the matter with his price division, *69 advised petitioner that O. P. A. regarded as a violation the use of top as a raw material rather than raw wool when raw wool was the actual raw material. Petitioner agreed to make a calculation of overcharges on that basis. Lee asked petitioner's representatives what efforts they had made to get an interpretation from O. P. A. and petitioner's representatives said they believed they had a right to do what they had been doing and had not asked for any interpretation from anyone.
At the conference of about October 20, 1944, Lee advised petitioner that it appeared to him that petitioner had not taken all practicable precautions and that O. P. A. policy required him to insist upon a settlement in excess of single damages for the statutory period (one *712 year) and as a part of that settlement that it must agree to complete compliance with the regulation as interpreted by O. P. A., such agreement to be by some sort of order entered in court. Walen agreed to go along with a settlement on that basis.
During their audit, O. P. A. accountants raised the further question whether petitioner, in computing its profit ratio, should have used the cost of goods manufactured in 1941, rather*70 than the cost of goods sold in 1941. Petitioner's representatives pointed out that the Administrator's Statement of the Considerations and his press release expressly interpreted the regulation as requiring the manufacturer to use the cost of goods sold. They further explained that it was not sensible to use the cost of goods manufactured in the denominator of the ratio. O. P. A. agreed that the Statement of the Considerations and the press release supported petitioner's views; however, the O. P. A. insisted that the strict language of the regulation controlled, regardless of the Administrator's Statement of the Considerations and his press release. Therefore, the profit ratio was recomputed as 1.1377, based on the cost of goods manufactured in 1941.
At a conference between O. P. A. and petitioner early in November 1944, Lee again asked petitioner if it was prepared to settle the case on the basis of O. P. A.'s interpretations, consenting to an injunction against future violations and a money payment of an amount equal to all the overcharges from the time of first figuring the ceiling prices of fabrics which, by definition, would be in excess of the overcharges for the statutory*71 year. It appeared from the tabulation O. P. A. had at that time, either on the basis of using foreign top in calculating ceiling prices until December 15, 1943, and foreign grease wool thereafter, or on the basis of foreign grease wool for the entire period, the money payment would exceed the overcharges for the statutory period of one year.
At O. P. A.'s request, petitioner prepared a schedule dated November 15, 1944, showing alleged overcharges of $ 2,065,842.02 for the period between June 22, 1942, and October 16, 1944. This schedule was computed by using (1) the March 1942 cost of foreign top as the raw material cost for fabrics filed with O. P. A. on or before December 15, 1943, (2) the March 1942 cost of foreign grease wool as the raw material cost for fabrics filed after December 15, 1943, and (3) a profit ratio of 1.1377. The alleged overcharges for the same period, previously computed on the basis of the same raw material costs and petitioner's profit ratio of 1.1560, came to $ 1,399,157.48, or a difference of $ 666,684.54. Of the $ 2,065,842.02, the amount of $ 1,287,579.40 represented alleged overcharges attributable to new fabrics sold and invoiced during the calendar*72 year 1944.
For a number of reasons the petitioner finally agreed to compromise the O. P. A. claims by paying $ 2,065,842.02. Government contracts *713 were then being cancelled and petitioner had to expand its civilian production. As long as the controversy continued, petitioner was unable to quote prices and do business in a competitive market. Petitioner's financial position was seriously jeopardized because of the controversy. About $ 2,100,000 in uncollected accounts had accumulated after the petitioner had suspended billing on October 16, 1944. At the same time, petitioner had undertaken heavy obligations for a new plant and machinery. On September 18, 1944, petitioner's board of directors had authorized the expenditure of $ 5,000,000 for a new plant. By November 1944, petitioner had entered into commitments involving about $ 1,250,000 of the $ 5,000,000 to be spent. Petitioner was facing the renegotiation of large Government contracts which eventually entailed a repayment of about $ 1,700,000, before taxes. In view of these facts, petitioner's officers decided that litigation with O. P. A. should be avoided, if possible.
Before the settlement was completed, Billings*73 proposed that the alleged overcharges, as finally computed, should be returned to petitioner's customers. But O. P. A. officials insisted that the money had to be paid to the Administrator, and the money was so paid.
Petitioner agreed that settlement would be accomplished along the lines of computing overcharges on the basis of O. P. A. interpretations throughout the entire period during which new fabrics had been priced under MPR 163, and a computation would also be made on the basis of the December 15, 1943, cutoff with a view to considering the amount so determined for settlement and agreed the case would be entered in court.
The following table shows the amounts of overcharges calculated for various periods determined by using raw materials and a profit ratio as indicated:
| Period | Raw material |
| June 22, 1942 to Oct. 16, 1944 | Foreign top for styles filed on or before |
| Dec. 15, 1943. | |
| Foreign grease wool for styles filed after | |
| Dec. 15, 1943. | |
| June 22, 1942 to Oct. 16, 1944 | Foreign top for styles filed on or before |
| Dec. 15, 1943. | |
| Foreign grease wool for styles filed after | |
| Dec. 15, 1943. | |
| Calendar year 1944 | Foreign top for styles filed on or before |
| Dec. 15, 1943. | |
| Foreign grease wool for styles filed after | |
| Dec. 15, 1943. | |
| June 22, 1942 to Oct. 16, 1944 | Foreign grease wool |
| Aug. 30, 1943 to Sept. 1, 1944 | Purchased foreign top |
| Oct. 13, 1943 thru Oct. 12, 1944 | Foreign grease wool |
| Oct. 13, 1943 thru Oct. 12, 1944 | All grease wool |
| Oct. 13, 1943 thru Oct. 12, 1944 | Foreign top |
| Oct. 13, 1943 thru Oct. 12, 1944 | Foreign top on fabrics filed up to and |
| including Dec. 15, 1943. | |
| Oct. 13, 1943 thru Oct. 12, 1944 | Grease wool on fabrics filed subsequent to |
| Dec. 15, 1943 |
| Period | Ratio | Overcharge |
| June 22, 1942 to Oct. 16, 1944 | 1.1560 | $ 1,399,157.48 |
| June 22, 1942 to Oct. 16, 1944 | 1.1377 | 2,065,842.02 |
| Calendar year 1944 | 1.1377 | 1,287,579.40 |
| June 22, 1942 to Oct. 16, 1944 | 1.1377 | 2,417,592.43 |
| Aug. 30, 1943 to Sept. 1, 1944 | 1.1560 | 1,006,857.71 |
| Oct. 13, 1943 thru Oct. 12, 1944 | 1.1377 | 1,957,949.53 |
| Oct. 13, 1943 thru Oct. 12, 1944 | 1.1560 | 1,460,831.48 |
| Oct. 13, 1943 thru Oct. 12, 1944 | 1.1377 | 1,625,358.30 |
| Oct. 13, 1943 thru Oct. 12, 1944 | 1.1377 | 1,498,848.87 |
| Oct. 13, 1943 thru Oct. 12, 1944 | 1.1377 | 170,323.97 |
*714 Lee was seeking to make an estimate of the overcharges for the statutory period that would be sufficiently accurate to furnish a fair basis upon which the court might act in the matter. Based on eleven-twelfths of the overcharges for the 1-year period, October 13, 1943, to October 12, 1944, Lee estimated the approximate overcharges for the 1 year preceding the entry of the action at a little less than $ 1,800,000.
On November 22, 1944, O. P. A. officials and petitioner's counsel appeared before Federal District Judge Wyzanski in the Federal Courthouse at Boston. Judge Wyzanski was presented with the complaint, *75 the answer, the stipulation for judgment, and the judgment. He was informed that there had been a controversy between the petitioner and O. P. A., that the parties had agreed upon a settlement requiring the payment of a sum of money to the O. P. A., that a bill of complaint was to be filed so that an injunction might be issued by consent, and that upon payment of the agreed amount a court order was to be entered. The parties did not discuss the issues of the controversy with Judge Wyzanski. After about 15 minutes, petitioner's counsel gave the O. P. A. officials a check for $ 2,065,842.02 in settlement of the controversy, and Judge Wyzanski signed the judgment. None of the $ 2,065,842.02 has been repaid to the petitioner.
The complaint as filed alleged as follows:
1. In the judgment of the Administrator, the defendant has engaged in acts and practices which constitute a violation of Section 4 (a) of the Emergency Price Control Act of 1942 (Public L. No. 421, 77th Cong., 2nd Sess., 56 Stat. 23), as amended, hereinafter called the Act in that the defendant has violated Maximum Price Regulation No. 163 (7 Fr. 4513), as amended, hereinafter called the Regulation, *76 effective in accordance with the provisions of the Act; and, therefore, pursuant to Section 205 (a) and Section 205 (e) of the Act, the Administrator brings this action to enforce compliance with said Regulation and for such damages in behalf of the United States as under the terms of the Act the Administrator is entitled to recover in behalf of the United States.
2. Jurisdiction of this action is conferred upon this Court by Section 205 (c) of the Act.
3. Since the issuance of the Regulation, the defendant at its place of business at Lawrence, Massachusetts, has sold and delivered woolen and worsted civilian apparel fabrics at prices in excess of those prices permitted by the Regulation. There is annexed hereto and made part hereof a schedule marked Exhibit A showing each fabric sold, the maximum permissible price and the amount of the overcharge. None of said sales were made for use or consumption other than in the course of trade or business. The amount of the overcharges during the year next preceding the commencement of this action is in excess of $ 1,800,000.00.
WHEREFORE, the Administrator demands:
A. a preliminary and final injunction
(1) enjoining the defendant from*77 selling or delivering any woolen or worsted civilian apparel fabrics at prices in excess of the maximum prices established by Maximum Price Regulation No. 163 (7 FR 4513) as amended, issued pursuant to the Emergency Price Control Act of 1942, as amended:
(2) enjoining the defendant from performing any act prohibited or failing *715 to perform any act required by the provisions of said Maximum Price Regulation No. 163, as amended.
B. judgment in behalf of the United States against the defendant in the sum of $ 1,800,000 or such other amount as the Administrator may be entitled to recover under the Act.
A schedule annexed to the complaint as "Exhibit A" recited alleged overcharges of $ 2,417,592.43 for the period between June 22, 1942, and October 16, 1944. This schedule was based on the March 1942 cost of foreign grease wool and a profit ratio of 1.1377. The petitioner's answer to the O. P. A. complaint declared:
1. The defendant is without knowledge or information sufficient to form a velief [sic] as to the truth of the amerment [sic] in Paragraph 1 of the complaint as to the judgment of the Administrator, but denies that it has engaged*78 in any acts or practices in violation of the Emergency Price Control Act of 1942, as amended, or of any maximum price regulation issued pursuant to said Act.
2. Further answering, the defendant hereby specifically denies all other averments in the complaint.
WHEREFORE the defendant prays that the complaint be dismissed and for its costs.
The stipulation for final judgment filed with the court read:
It is hereby stipulated and agreed by and between the plaintiff, Chester Bowles, Administrator of the Office of Price Administration, by counsel, and the defendant, by counsel, that
1. The plaintiff's claim for damages with respect to the alleged violations as set forth in the Complaint having been adjusted by the parties, the same is to be dismissed with prejudice but without costs. However, it is understood between the parties and made part of this stipulation that such adjustment does not extend to or cover any other violations of said Act than those aris- [sic] from the sales specified in the Complaint filed in this action even though such other violations may have occurred in sales to the same purchasers as were involved in the specified transactions set forth in the Complaint; *79 and
2. Final judgment in the form hereto annexed may be entered against said defendant without notice at any time hereafter.
Signed at Boston this 22nd day of November, 1944.
The final judgment dismissed the O. P. A. claim for damages and enjoined any violations of MPR 163 in the following language:
The plaintiff and the defendant having through counsel entered into a stipulation on the 22 day of November, 1944, which stipulation is filed in the Office of the Clerk of the Court and the plaintiff's claim for damages having been adjusted and the parties consenting to the entry of final judgment in the form below and sufficient reasons therefore appearing:
NOW, IT IS ORDERED, ADJUDGED AND DECREED THAT
(1) the plaintiff's claim for damages is dismissed with prejudice but without costs
(2) the defendant is enjoined from selling or delivering any woolen and worsted civilian apparel fabrics at prices in excess of the maximum prices established by Maximum Price Regulation No. 163, as amended, issued pursuant to the Evergency [sic] Price Control Act of 1942, as amended;
*716 (3) the defendant is enjoined from performing any act prohibited or failing to perform any act required *80 by the provisions of Maximum Price Regulation No. 163, as heretofore or hereafter amended.
The release delivered to the petitioner by O. P. A. stated:
In consideration of $ 2,065,842.02 received by me on behalf of the United States of America, I, Chester Bowles, as Price Administrator of the Office of Price Administration, hereby release and discharge Pacific Mills from any and all claims which the Price Administrator has arising under Section 205 (e) of the Emergency Price Control Act of 1942, as amended, by reason of the sales described in the Bill of Complaint and particularly Exhibit A annexed thereto, filed in the United States District Court for the District of Massachusetts in the case of Bowles, Administrator vs. Pacific Mills, Civil Action No. 3150.
This release does not extend to or cover any other violations of said Act than those specified above even though such other violations may have occurred in sales to the same purchasers as were involved in the above specified transactions.
Except as expressly stated herein, nothing herein shall be construed in any way to limit, impair, prejudice, or bar in any manner whatsoever the right or duty of the United States of America, *81 or any officer or agency thereof, to bring or cause to be brought any action or proceeding pursuant to the said Act or any law of the United States for and concerning the said overcharges and periods of time hereinabove mentioned.
In its tax returns for the year 1944, petitioner deducted from its gross income under "Schedule K -- Item 29 -- Other Deductions: Settlement with Office of Price Administration $ 2,065,842.02." The Commissioner has disallowed this deduction without stating in the deficiency notice the reason for his disallowance.
During the course of the negotiations between petitioner and O. P. A. petitioner pointed out that the profit ratio for 1941 worked a hardship on petitioner as that profit ratio was computed on the basis of the cost of top to the extent top was used in 1941. Petitioner from 1942 on expanded its own production facilities and bought increasing quantities of raw wool and, therefore, petitioner contended that the pricing formula under MPR 163 was distorted by applying a profit ratio based on relatively higher costs of raw materials against a relatively lower cost of raw materials. Therefore, the petitioner contended, if its maximum prices were now *82 to be based on grease wool as the raw material, it should also be allowed to use a profit ratio based on grease wool as its raw material. Although O. P. A. was impressed by petitioner's argument, the existing regulation did not provide for any treatment other than determined by O. P. A. Petitioner was advised to file an application to amend the regulation.
On October 30, 1945, O. P. A. issued Amendment 17 to MPR 163, which stated that if "since 1941 any manufacturer" had "changed his method of operation" he could increase his 1941 profit ratio by 50 per cent of the difference between his existing ratio and a ratio computed as if his "changed method of operation" had "been in effect in 1941." *717 A "changed method of operation" included "a change from the use of purchased top to purchased raw wool." Under Amendment 17 the petitioner's profit ratio which O. P. A. had reduced from 1.1560 to 1.1377 increased to 1.1507.
On March 26, 1946, the O. P. A. Administrator issued Amendment 19 to MPR 163. In regard to the cost of raw material, Amendment 19 authorized a manufacturer of new worsted fabrics to calculate its cost "at the highest cost which the manufacturer incurred for raw *83 material purchased during March 1942." A footnote added that "if a mill did not buy in March 1942 the type of raw material it intends to use at present, it shall use March 1942 ceilings for such raw material." With respect to manufacturing costs, Amendment 19 authorized a manufacturer of new worsted fabrics to use the manufacturing costs "determined in accordance with the customary accounting practice of the manufacturer, incurred (or which he would have incurred) in the manufacture of the fabric during" March 1942. In addition, Amendment 19 added a definition of "raw material" for the purpose of determining the raw material cost. "Raw material" was defined as "whatever materials the mill purchases for processing." Amendment 19 also permitted the 1941 profit ratio to be computed either on the basis of the cost of goods manufactured or invoiced in 1941, provided that a manufacturer who prior to March 26, 1946, reported to the O. P. A. his profit ratio by one of these methods was not now entitled to change. In view of Amendment 19, the petitioner recomputed its 1941 profit ratio for future use in determining the proper ceiling price to charge for its products on the basis of the cost*84 of goods sold in 1941, instead of the cost of goods manufactured in that year. On June 3, 1946, O. P. A. approved the petitioner's use of the cost of goods sold.
The petitioner's profit ratio as recomputed under Amendments 17 and 19 was 1.1641, as compared with its earlier ratio of 1.1560 which O. P. A. had reduced to 1.1377 in 1944.
In calculating its ceiling price of new woolen and worsted fabrics during the period here in question petitioner did not fail to take practicable precautions in applying the provisions of MPR 163, and petitioner's actions were in good faith and not the result of an unreasonable lack of care.
OPINION.
The sole question in this proceeding relates to the payment of $ 2,065,842.02 made by petitioner on November 22, 1944, to O. P. A. in settlement of a claim arising under section 205 (e) of the Emergency Price Control Act of 1942, as amended.
Petitioner's primary contention is that the $ 2,065,842.02 which it paid in 1944 in settlement with O. P. A. for alleged violation of the *718 price control law and O. P. A. regulations is deductible as an ordinary and necessary business expense under section 23 (a) (1) (A), I. R. C., but that if the amount is not*85 deductible as a business expense, it is deductible as a loss under section 23 (f) of the Code. These contentions are made under petitioner's assignment of error (a) in its amended petition. In the alternative, petitioner contends that $ 1,287,579.40, the amount of the payment to O. P. A. attributable to sales made and invoiced in 1944, was not includible at all in petitioner's gross income for 1944. This alternative contention is made in petitioner's assignment of error (b) in its amended petition.
Respondent contends that the $ 2,065,842.02 is neither deductible as an ordinary and necessary business expense nor as a loss, and that petitioner may not exclude from gross income for 1944 any part of the amount paid to the O. P. A. on behalf of the United States.
Where the O. P. A. has received payment from a taxpayer as a result of a claim under section 205 (e) of the Emergency Price Control Act of 1942, as amended, the payment is allowed as a deduction under section 23 (a) (1) (A) of the Code if the violation of the price regulation, order or schedule was neither wilful nor the result of failure to take practicable precautions against the occurrence of the violation ( Jerry Rossman Corp. v. Commissioner, 175 F.2d 711">175 F. 2d 711,*86 reversing 10 T.C. 468">10 T. C. 468), or if "The violation was inadvertent and unintentional rather than in deliberate or careless disregard of the law." Farmers Creamery Co. of Fredericksburg, Va., 14 T. C. 879. The deduction has not been allowed, however, where the taxpayer has failed to show the violation was neither wilful nor the result of failure to take practicable precautions where the violation is not innocent and unintentional and made without the exercise of reasonable care. National Brass Works, Inc. v. Commissioner, 182 F.2d 526">182 F. 2d 526; National Brass Works, Inc., 16 T. C. 1051; Henry Watterson Hotel Co., 15 T.C. 902">15 T. C. 902; Garibaldi & Cuneo, 9 T.C. 446">9 T. C. 446.
The cases involving claimed deductions for payments made to O. P. A. under section 205 (e) of the Emergency Price Control Act of 1942, as amended, and which have allowed such payments as deductions rely on Commissioner v. Heininger, 320 U.S. 467">320 U.S. 467, where the Supreme Court held that the legal expenses incurred in the unsuccessful*87 defense of a postal fraud order were deductible. The Court said: "If the respondent's litigation expenses are to be denied deduction, it must be because the allowance of the deduction would frustrate the sharply defined policies * * * which authorize the Postmaster General to issue fraud orders." The Heininger case, supra, has been interpreted as applying not only to the deduction of legal expenses, but also to the deduction of payments to O. P. A.Jerry Rossman Corp. v. Commissioner; National Brass Works, Inc. *719 v. Commissioner; Henry Watterson Hotel Co., all supra. The test is whether the allowance of the deduction will frustrate the sharply defined policies of the Emergency Price Control Act of 1942, as amended. In the Jerry Rossman case, Judge L. Hand, speaking for the court, said:
* * * One may indeed argue, as the Commissioner does, that the more unsparing and relentless was the pursuit of offenders, however innocent they may have been of any wilful violation of the regulations, the more solicitous would they become to comply, and the more effective would be the enforcement of the Act. That has been a school of penology since the time *88 of Draco; but it has not been the only school, and, as we read Commissioner v. Heininger, supra, the Supreme Court did not accept it. The Administrator did not believe that such a rigid and uncomprising [sic] policy was the best way to realize the purposes of the Act. When the amendment to § 205 (e) was being considered in 1944, he declared in a letter to the Senate Committee "that the protection of innocent violators from excessive damages" was "obviously desirable"; and that it had been his "policy to adjust cases involving innocent violations by payment of merely the amount of the overcharge." He thought that Congress had given him discretion not to sue for "treble damages" in some instances, and he had exercised that discretion so as "to avoid undue hardship in deserving cases." [It may be noted in the instant case that O. P. A. Director did not ask for treble damages and none have been paid.] In short, he did not believe that it paid to sweep into the same pool with wilful or careless violators, violators for whom the daedalian mazes of the regulations had proved too much. Moreover Congress showed in 1944 by the amendment of § 205 (e) that it *89 agreed with the Administrator. It seems to us that we should accept these expressions as evidence that in cases where the Administrator accepted the overcharge as sufficient, it did not "frustrate" any "sharply defined" policies of the Emergency Price Control Act of 1942.
Since under the provisions of section 205 (e) of the Emergency Price Control Act of 1942, as amended, "if the defendant proves that the violation of the regulation, order, or price schedule in question was neither willful nor the result of failure to take practicable precautions against the occurrence of the violation" the amount recoverable shall be the amount of the overcharge or $ 25, whichever is greater, the allowance as a deduction of payments to O. P. A., where this defense is shown, would not frustrate the policy of the act. Jerry Rossman Corp. v. Commissioner; National Brass Works, Inc. v. Commissioner, both supra. The purpose of the amendment to section 205 (e) whereby the treble damage provision could not be enforced against innocent violators was to reduce the possible severe "penalty" imposed upon those who could show their actions and mistakes were honest and without the intent to *90 commit a violation -- where practicable precautions had been taken and there was no wilful violation. 90 Cong. Rec. 5375-5384, 5435-5451, 5886-5887 (1944).
In Garibaldi & Cuneo, supra, we held that the taxpayer could not deduct as an ordinary and necessary expense the payment to O. P. A.*720 of one and one-half times the amount of the overcharges in settlement of an action for treble damages. In Garibaldi & Cuneo we found that:
The petitioner has failed to show that it could not have made correct computations of the maximum price on bananas under the applicable OPA regulation during the taxable year if it had exercised ordinary diligence and reasonable intelligence in attempting to make such computations.
In Henry Watterson Hotel Co., supra, the taxpayer was not allowed to deduct the payments to O. P. A. where taxpayer "offered no explanation whatsoever as to the reasons for the overcharge," and in National Brass Works, Inc., supra, we held that the taxpayer was not entitled to deduct a payment to O. P. A. where the taxpayer deliberately and knowlingly failed to comply with the *91 price regulation and where it was not shown that the overcharge was innocently and unintentionally made. In National Brass Works, Inc., supra, we commented upon the rule that we considered had been followed in cases involving these O. P. A. overcharges in the following language:
* * * But it appears from the Rossman case that "adequate care" means care to avoid the making of any overcharges knowingly. That is, if the overcharges were unwittingly and innocently made, as in the Rossman case, allowing a reduction of the overpayment of such overcharge would not "frustrate" the Price Control Act. As we read the Rossman case and the opinion of the Ninth Circuit in the present case on appeal, the opposite result should follow where the record shows the overcharge was deliberately or "intentionally made."
After a careful consideration of all the evidence we have found that in the instant proceeding petitioner, in good faith and with the exercise of reasonable care, calculated its ceiling prices which it believed were in accordance with MPR 163. The overcharges which it made were not deliberately nor intentionally made.
In the instant proceeding*92 the payment of O. P. A. was, as we have found in our Findings of Fact, in excess of the amount of the alleged overcharges for the statutory period of 1 year and respondent argues that because the total amount paid to O. P. A. was more than the amount of the overcharge for the statutory period this precludes any finding that the alleged violation was neither wilful nor the result of failure to exercise practicable precautions. Section 205 (e), Emergency Price Control Act of 1942, as amended. We think this contention is without any merit when the facts in evidence are considered. The payment here was a settlement and the district court proceeding and the judgment and injunction issued out of that proceeding were all by consent and without a decision on the merits. There is no finding by any court, as we found in the National Brass Works, Inc., case, supra, that the taxpayer "deliberately and knowingly failed to comply with the price regulations and had not shown that the overcharges *721 were innocently and unintentionally made." The whole purpose of the payment to O. P. A. in the instant case was to settle a claim for an alleged violation of MPR 163 which petitioner*93 believed it did not violate, but, that if it did violate, it did so without any wilful intent. While petitioner paid $ 2,065,842.02 to O. P. A., its liability for treble damages for the statutory 1-year period might have been approximately $ 5,400,000. Although the payment to O. P. A. exceeded the statutory 1-year overcharges, the excess over this amount was not an arbitrary figure for the purpose of making the payment punitive, but rather the entire amount was carefully calculated to reflect the overcharges for the entire period from June 22, 1942, to the date of settlement in such a way as to remove petitioner's profit from past overcharges.
The administrative determination, if any, is not final on the question of adequate care ( Jerry Rossman Corp. v. Commissioner, supra) as that question is to be judicially determined on the merits. National Brass Works, Inc. v. Commissioner, supra. See also Utica Knitting Co.v. Shaughnessy in the United States District Court for the Northern District of New York, decided September 4, 1951. In that case it was held that the amounts paid to the Government in 1946 *94 in settlement of damages for O. P. A. violations were deductible in that year on the accrual basis since there was a binding adjudication in that year as to taxpayer's liability and neither wilfulness nor carelessness was involved in the violations. In rendering summary judgment for the plaintiff taxpayer, the court said:
The decisions in the Jerry Rossman and National Brass Works cases, supra, eliminate the necessity of discussing and deciding several contentions made before this Court. They plainly hold that a deductible expense is not determined by the label placed thereon, and the question as to whether or not the payments made by the plaintiff here may be termed penalties is not decisive. Neither is the fact that a violation of law is directly involved. Each case must be decided upon its own facts. ( Commissioner v. Heininger, 320 U.S. 467">320 U.S. 467.) The decision follows, based upon the circumstances of the violation and the effect of the allowance of the deduction upon the enforcement of the law violated.
Because we have found as a fact that the alleged violation of MPR 163 was neither wilful nor a result of failure to take practicable*95 precautions and was not a result of unreasonable lack of care, the payment of $ 2,065,842.02 which petitioner paid O. P. A. in 1944 was properly deducted by petitioner under section 23 (a) (1) (A) of the Internal Revenue Code in determining its net income. As a result of this holding, it is unnecessary for us to decide petitioner's alternative contentions.
Decision will be entered under Rule 50.
Footnotes
1. Sections 1410.102 and 1410.115 of MPR 163 originally described three principal types of woolen and worsted civilian fabrics: base period fabrics, comparable fabrics, and new fabrics. A base period fabric was a fabric which the manufacturer had sold before the issuance of MPR 163. A comparable fabric was a fabric not previously sold by him but substantially similar to a base period fabric sold by him. Generally speaking, comparable fabrics were like base period fabrics except that comparables were manufactured from different blends of raw material. A new fabric was a fabric which did not fall within the definitions of base period and comparable fabrics. Later, on September 8, 1942, Amendment 4↩ to MPR 163 added the category of similar fabrics, as defined in section 1410.102 (i) of MPR 163.